Highlights

SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of consensus and the news cycle on the macro policy events driving global markets.

2022
July 13, 2022
SGH Insight
Markets have taken to heart European Central Bank President Christine Lagarde’s guidance to expect a modest, 25-basis point hike lift-off from the bank’s negative 0.50% deposit rate at its upcoming Governing Council meeting on Thursday, July 21.
That 25 bp lift-off, as we have written, is expected by ECB officials to be followed almost certainly by 50 basis points at their next meeting in September, with a high likelihood that at least one of the next two meetings of 2022 also results in a 50-basis point hike.
Those expectations, in particular the odds of a 50-basis point hike in July, may rise over the course of the next week, even as the ECB enters a blackout period on communications.
Our understanding is that there is strong and broad consensus across the Governing Council on the need to, at a minimum, get rates above the lower end of the ECB’s roughly 1-2% estimate for nominal neutral rates for the euro zone — in an expeditious fashion.
And so as we wrote in our last ECB report, for all the market concerns over recession and the specter of a severe energy squeeze from Russia over the winter, having come late to the hiking cycle, and with some ground to be made up before rates are “normalized,” the default mode for the ECB in the early part of the cycle will be towards 50 bp hikes, with the penciled in 25 bp lift-off essentially representing a sort of “anomaly” (see SGH 7/5/22; “ECB: Hiking Through a Slowdown”).
In such an environment, we believe the odds for a surprise 50 in July are high, and arguments for a more cautious first-rate hike are increasingly hard to justify, especially with the roll out of an anti-fragmentation backstop that will help allay concerns over an “unwarranted” blow-out in peripheral (Italian) bond spreads now slated for release also on July 21.
Market Validation
Bloomberg 7/21/22

ECB Raises Main Refinancing Rate By 50BPS to 0.5%; Est. 0.250%

European Central Bank raised its main refinancing rate more than economists expected.
Main refinancing rate raised to 0.5% (estimate 0.250%)
38 of 46 economists in Bloomberg's survey expected 0.250%

Dow Jones 7/21/22

ECB Surprises as It Hikes Interest Rate by Half Percentage Point

The European Central Bank announced a larger-than-expected interest-rate increase of half a percentage point and outlined a new plan to buy the debt of Europe's most vulnerable economies, taking bold action to protect the currency union as it navigates the twin threats of skyrocketing inflation and slowing economic growth.
The ECB's surprise move on Thursday takes its key interest rate to zero and ends the bloc's controversial eight-year experiment with negative interest rates.
It suggests that the bank's top officials are increasingly concerned about the threat of persistently high inflation in the eurozone. Officials had telegraphed for weeks that the bank would likely raise rates by only a quarter percentage point this month.
The ECB said it would continue to increase rates toward a more normal level. It also said it had created a new bond-buying program, known as the Transmission Protection Instrument, which will ensure that the bank's interest rates are transmitted smoothly across the currency union. The scale of purchases under the new program will depend on the severity of the risks, the ECB said.

Bloomberg 7/21/22

The euro rallied and European bonds extended declines after the European Central Bank raised rates by 50 basis points.
German 2-year yields rise 17bps to 0.78%

Reuters 7/19/22

European Central Bank policymakers are considering raising interest rates by a bigger-than-expected 50 basis points at their meeting on Thursday to tame record-high inflation, two sources with direct knowledge of the discussion told Reuters.
To cushion the impact of the higher borrowing costs, policymakers are also expected to announce a deal to help indebted countries like Italy on the bond market. The deal will require they stick to European Commission rules on reforms and budget discipline, the sources said.

Bloomberg 7/19/22

The euro jumped to a two-week high and
short-dated bonds slid across Europe as markets priced in a more
aggressive pace of interest-rate hikes from the European Central
Bank.
The common currency rose more than 1.2% after reports that
ECB policy makers may consider a 50-basis-point rate hike at
their meeting on Thursday, larger than the quarter-point move
signaled in June.
That led money markets to bet on almost 50% odds of a half-
point hike this week and more than a percentage point by
September. Shorter maturity bonds led a selloff, with German
two-year yields -- among the most sensitive to changes in policy
-- surging as much as 12 basis points to 0.64%.
Read Full Report
July 11, 2022
SGH Insight
US Treasury Secretary Janet Yellen has been tasked with the formidable challenge of selling a buyer’s cartel/oil price cap scheme to America’s major economic global counterparts when she travels to Bali, Indonesia for the G20 meeting of finance ministers and central bank governors later this week.
Intended to force Russia to sell its oil at a substantial discount from market prices, a unified “G20-minus 1” position on the oil price caps – Russia, of course, would never agree — would entail convincing Moscow’s allies and major swing importers of Russian oil China and India to go along with the scheme. It would also need sign off from other member states who have tended to avoid taking sides against Russia in its aggression against Ukraine, including South Africa, Brazil, and the host country itself, Indonesia.
That is not likely to happen.
Market Validation
Bloomberg 7/17/22

An oil-price cap initiative to mitigate global inflation
while punishing Russia over what she calls “horrific
consequences” of the war in Ukraine has been high on the agenda
for US Treasury Secretary Janet Yellen, but a non-starter for
others like China and India. Indrawati said she will discuss the
proposal with Indonesia’s energy-related ministries.
Treasury said in a statement Yellen held a number of
bilateral meetings including sessions with Saudi Arabia’s
Finance Minister Mohammed Al-Jadaan, Australian Treasurer Jim
Chalmers, South African Minister of Finance Enoch Godongwana and
Singapore’s Deputy Prime Minister Lawrence Wong. The statement
didn’t include details with how ministers responded to Yellen’s
appeal on the oil price cap.

Read Full Report
July 08, 2022
SGH Insight
Russia’s Defense Minister Sergei Shoigu held a video call recently with China’s Defense Minister Wei Fenghe on the Ukraine crisis and Sino-Russian military cooperation.
During the call, Shoigu expressed his satisfaction with Russian military operations in the Donbas region. Shoigu told Wei the ongoing battle in Donetsk will be the most important battle in Russian special military operations after the battles of Mariupol and Luhansk. The Russian and Ukrainian amies are gathering their most elite military units to fight. As long as [once?] Donetsk is seized, the Russian army will no longer have large-scale military operations in Ukraine.
The Chinese side predicts that after seizing all of the Luhansk region, the Russian army will take full control of the Donetsk region within a few weeks and the entire Donbas region within two months. [China believes] the outcome of Russia’s special military operation in Ukraine is clear: Russia will win the war without doubt – Russia has de facto territorial control of eastern Ukraine, linking Crimea, four eastern Ukrainian states, and Russian territory.
The Chinese side believes the situation is becoming more and more disadvantageous to Ukraine. It is time for Kyiv to sit down and negotiate with Moscow as soon as possible. The longer the delay in negotiations with Russia, the more land Ukraine will lose.
As far as Beijing knows, Putin’s two major military objectives remain unchanged: 1 – To completely restore the territory of the two “republics” of Luhansk and Donetsk; 2 – [to control] the de facto occupied territories of Kherson and Zaporozhe regions.
Market Validation
Reuters 7/21/22

Lavrov said geographical realities had changed since Russian and Ukrainian negotiators held peace talks in Turkey in late March that failed to produce any breakthrough.
At that time, he said, the focus was on the Donetsk and Luhansk People's Republics (DPR and LPR), self-styled breakaway entities in eastern Ukraine from which Russia has said it aims to drive out Ukrainian government forces.
"Now the geography is different, it's far from being just the DPR and LPR, it's also Kherson and Zaporizhzhia regions and a number of other territories," he said, referring to areas well beyond the Donbas that Russia has wholly or partly seized.
"This process is continuing logically and persistently."
Read Full Report
July 06, 2022
SGH Insight
...senior officials in Beijing note that the request from Secretary Yellen for a meeting of the heads of state comes on the heels of two similar requests that were made by National Security Advisor Jake Sullivan to China’s top diplomat and Politburo member Yang Jiechi, both of which were shelved at the time.

This time, we are told, “President Xi will consider it,” and well-placed officials suggest the two leaders may hold a video conversation call this month.

That would allow Xi Jinping to speak with Biden before he goes on the annual leadership summer retreat at Beidaihe...
Market Validation
Bloomberg 7/10/22

US President Joe Biden and his Chinese
counterpart Xi Jinping are set to speak again in the coming
weeks, Secretary of State Antony Blinken said on Sunday.
Blinken spoke with Chinese Foreign Minister Wang Yi a day
earlier for more than five hours to help lay the groundwork for
a call between the leaders. While Biden said last month he would
speak with Xi “soon,” Blinken suggested it was getting closer.
“With regard to President Xi and President Biden, our
expectation is that they will have an opportunity to speak in
the weeks ahead,” Blinken told reporters during a stop in
Bangkok, Thailand.

Read Full Report
July 06, 2022
SGH Insight
Fullsteam Ahead for the Fed

Since the June meeting, commodity prices have dropped sharply, raising the question of whether the Fed would remain committed to “expeditiously” raising rates to neutral by the end of the year. In particular, clients ask about the Fed’s willingness to carry through with the expected 75bp July hike. We think the Fed would find it difficult to deviate from the current plan.


Market Validation
Bloomberg 7/9/22

Shorter-dated Treasuries slumped Friday,
sending yields surging, after a stronger-than-expected US jobs
report bolstered the case for bigger interest-rate increases by
the Federal Reserve.
The two-year Treasury yield leaped as much as 13 basis
points to 3.14%, while swaps showed increased odds that
officials will choose to lift the Fed benchmark by 75 basis
points in July rather than 50. Expectations for where the Fed’s
benchmark might peak in the first quarter of 2023 jumped to more
than 3.6% as traders looked ahead to consumer price inflation
data next week.

Read Full Report
July 05, 2022
SGH Insight
The Fed remains committed to restoring price stability even at the expense of growth. I think recession fears are premature, but even if not, the Fed is not likely to break from current messaging, including consensus support for 75bp in July. I expect that outlook to be reinforced by hawkish minutes this week. Yes, the Fed seemingly made a last-minute shift to 75bp at the June meeting on relatively little new data, giving reason to worry that relatively little new data could trigger a reversal. Still, I think the bar to remaining hawkish is lower than to becoming more dovish.
Market Validation
Bloomberg 7/6/22

*FED OFFICIALS SAW 50 BPS OR 75 BPS HIKE AT JULY FOMC AS LIKELY
*FED MINUTES: `EVEN MORE RESTRICTIVE' POLICY POSSIBLE IN TIME
*FED OFFICIALS RECOGNIZED POLICY COULD SLOW GROWTH FOR A TIME
*MOST FED OFFICIALS SAW GROWTH RISKS SKEWED TO DOWNSIDE
*MANY ON FOMC SAW SIGNIFICANT RISK OF ENTRENCHED INFLATION
*FED: MANY CONCERNED LONG-RUN PRICE EXPECTATIONS COULD DRIFT UP
Treasury Yields Surge as Fed Minutes Underscore Inflation Fight
Yields at session highs after Fed minutes from June arrive
Minutes show inflation worries trump growth concerns

Treasuries extended their losses, driving yields to session highs, after the minutes of the most recent Federal Reserve meeting underscored policymakers’ commitment to tighten monetary policy aggressively to keep inflation from becoming entrenched in the economy.
Benchmark yields rose in mid-afternoon trading in New York, up more than 10 basis points across much of the curve, after the minutes from the June meeting showed officials saw a significant risk of entrenched inflation and that “even more restrictive” policy was possible.
The jumps capped another volatile day in the world’s largest bond market as traders try to navigate between the risks of persistent inflation and a potential recession set off by rising rates.
Yields on two-year Treasury notes -- among those that are more sensitive to central bank policy -- jumped 13 basis points to 2.95%, more than erasing a 6 basis point drop from earlier in the day. The swings mirrored the trading from Tuesday, when 2-year yields swung between a 13-basis-point advance and a 6-basis-point drop before ending the day little changed.
The 10-year higher by 12 basis points at 2.92%. The three-year note led the market selling, pushing the yield up 16 basis points to 2.98%.

Read Full Report
July 05, 2022
SGH Insight
...The challenge however for traders who are now wiping rate hikes off the table over recession fears is that energy supply cuts are of course also highly inflationary, and the ECB already has a serious, imminent, and spreading inflation problem at hand, even as it is likely to significantly mark growth down from its June estimates.
Perhaps most important of all is the long-term evidence that, in Lagarde’s own words, after 25 years of an “heroic” fight against disinflation, the global central banks are facing a “new regime” in which the cost of dealing with the retrenchment of a high-inflation regime is unacceptably high.
To riff off the popular Game of Thrones, “winter is coming,” but the ECB will unfortunately have to hike rates through the slowdown...
Market Validation
New York Times 7/26/22

Pierre Wunsch, a member of the European Central Bank’s Governing Council, said the deposit rate should probably reach at least 1.5 percent.
The European Central Bank should keep raising interest rates to tackle inflation even if the eurozone slips into a recession, said Pierre Wunsch, a member of the bank’s Governing Council and the head of Belgium’s central bank.
Increasing the E.C.B.’s deposit rate to 1.5 percent is a “no brainer,” Mr. Wunsch said, as long as the economy didn’t fall into a “deep recession.” Last week, the bank raised interest rates for the first time in more than a decade, lifting the deposit rate from minus 0.5 percent to zero.

For fifty in sept its the same clip

The bank has been slower to raise rates and end its bond-buying program than other major central banks because much of the inflation in the eurozone has been generated by rising energy prices, exacerbated by Russia’s war in Ukraine, and there was little the bank could do to control those price increases. But as inflation has spread to more goods and services and risks becoming more entrenched in the economy, the bank raised rates by twice as much as it indicated it would last week.
Mr. Wunsch said his preferred course of action given the economic outlook was to raise rates in half-percent increments and then maybe slow down when the deposit rate is closer to reaching 1.5 percent. Last week, the central bank withdrew some of its so-called forward guidance on interest rates, in which central bankers send strong signals to markets about what they plan to do in the future, and said decisions would instead be decided by a “meeting-by-meeting approach.”
Read Full Report
June 21, 2022
SGH Insight
The Fed intensified its commitment to its inflation target last week, accelerating the pace of rate hikes to 75bp increments and raising the expected terminal rate to 3.8%. In the statement that followed the FOMC meeting, the Fed emphasized its commitment to price stability but offered no such commitment to the employment side of the mandate. While the Fed isn’t trying to induce a recession, and while no Fed speaker will predict a recession, the Fed has already made clear that if the choice is between recession and inflation, it now chooses recession. The Fed has committed to maintaining rate hikes until inflation is clearly on a path to 2%, something that will likely not be evident in the data for several months. If inflation prevents the Fed from pivoting to rate cuts when the economy turns, a recession feels all but guaranteed under the current guidance...

...The next several months will become very uncomfortable. We have become accustomed to the Fed responding quickly to signs of economic weakness, but in recent history those have always occurred in a period of low inflation. Now the Fed will hold rates higher for longer by design, which will appear as if it is ignoring the real side of the economy. Assuming the Fed does not change its guidance, it needs to see clear and compelling evidence of slowing inflation before it can pause rate hikes. Considering that inflation lags the cycle, we aren’t likely to see significant slowing in the near-term. For example, the Cleveland Fed predicts core-CPI will be 0.49% in June, the only release before the July FOMC meeting (which helps guarantee a 75bp hike).
Moreover, one or two soft inflation prints will not likely suffice to convince the Fed that it will restore price stability given that the Fed tried that strategy last year and was badly burned when inflation rebounded in the fall after an apparent improvement over the summer. That error will create a bias in the opposite direction, and could set up a dichotomy with markets, where the Fed will tend to dismiss any good news on inflation (from, for example, any discounting that occurs when retailers try to shed excess inventories) as insufficient to justify a policy shift. At the same time, we can expect slowing in the interest rate sectors of the economy and eventually a weaker job market...
Market Validation
Bloomberg 6/23/22

Traders Hedge Fed Cuts in 2023 as Recession Risk Hits Yields

A newfound uneasiness on where US interest rates will be a year from now has started to fester throughout the bond market, as traders seek hedges to cover against an abrupt dovish shift in the Federal Reserve’s policy plans.
With fears of a recession evolving, rates extended their plunge Thursday, taking the three-year Treasury rate down more than 20 basis points to less than 3%. Ominously, traders are also piling into hedges that protect against Fed policy rates not only topping out, but actually being cut back down toward zero as soon as next year.
The moves follow comments from Fed Chairman Jerome Powell on Wednesday which appeared to accept that steep rate increases could trigger a US recession.

Bloomberg 6/24/22

Inflation could remain high until the second half of next year, despite the Federal Reserve’s rate hikes and the after-effects of higher oil prices, according to a blog post published Friday by the New York Fed.
Inflation is accelerating both in the US and the euro area, and the expected path for policy rates has risen sharply in both economies, the researchers say.
Those factors, when combined with the potential for a slowdown in economic growth, add more uncertainty to the outlook for inflation, they say.
“Based on our analysis, we anticipate that inflation will likely remain elevated through the second quarter of 2023, despite payback for the inflationary impact of current negative oil supply shocks during the second half of 2022 and the disinflationary effects of tighter monetary policy,” researchers wrote in the blog post.
Tighter monetary policy alone is not enough to explain the deceleration projected for U.S. inflation over the next year.
“There is an important role for disinflationary payback in the latter part of 2022 for the current inflationary consequences of recent adverse oil supply shocks, driving the downside risk to the forecast,” the post says.
Inflation is projected to ease somewhat in both the US and the euro area, “but will remain elevated by May 2023.” There is a “higher likelihood of a larger-than-expected easing of inflation in the United States compared to the euro area.”
Read Full Report
June 15, 2022
SGH Insight
Weaker UK growth and wages data all but lock in another 25bp hike by the Bank of England tomorrow as it races to get spiraling inflation under control to avoid it ravaging household spending power and plunging the UK economy into recession.
This week’s data will likely constrain the Bank’s policy choice for this meeting to a 25bp hike despite the possibility for additional dissents for a larger move by the Bank’s Monetary Policy Committee (MPC) members. At its early May meeting when the MPC raised rated 25bp to 1%, Michael Saunders, Catherine Mann, and Jonathan Haskel dissented in favor of 50bp.
This time around, that continued pressure may however force the MPC to amend its forward guidance so that it at least widens its options for additional moves later this year.
In May the Bank said, “most members of the Committee judge that some degree of further tightening in monetary policy may still be appropriate in coming months,” but it noted “risks on both sides of that judgement.”
The Bank may seek to harden that guidance as it continues to navigate what it calls a narrow path between the twin risks of upside prices and the intensifying squeeze on real household incomes that is coming from higher energy and goods prices. That dichotomy is splintering consensus as members are increasingly forced to choose between hitting their inflation target within their forecast horizon and avoiding a more pronounced recession.
Market Validation
Bloomberg

The Bank of England hiked interest rates for
a fifth straight meeting and sent its strongest signal yet that
it is prepared to unleash larger moves if needed to tame
inflation.
The nine-member Monetary Policy Committee voted 6-3 to
increase rates by 25 basis points to 1.25%, with a minority of
officials maintaining their push for a move double that size.
Still, the BOE hinted that it may join a growing global
trend for larger hikes if inflation continues to soar, saying
“it would be particularly alert to indications of more
persistent inflationary pressures, and would if necessary act
forcefully in response.”
Crucially, that language was endorsed by all the BOE’s
voters, a departure from May when two declined to sign up to
guidance that more hikes were needed.

Read Full Report
June 15, 2022
SGH Insight
Going through the various cycles in the ECB’s history, Schnabel recounts periods of dangerously compressed eurozone sovereign yields, as well as the historic blow outs in southern European bond markets during the European debt crisis of 2010-12, putting the current widening of spreads in historic context in a series of charts in the appendix that are highly illustrative.
As to the current state of affairs, Schnabel reiterates the ECB position — which we have repeatedly written as well — that the ECB has dealt with fragmentation successfully many times in its history, can easily redirect Pandemic Emergency Purchase Program bond reinvestments as needed to surf any excess (peripheral) market volatility, can structure new facilities if and as needed for new situations, and that the ultimate backstop against eurozone fragmentation is the ECB’s unwavering and unquestioned commitment to the euro.
Market Validation
Bloomberg

“With regard to Italy -- I’m personally of
the standpoint that we should not do too much,” European Central
Bank Governing Council member Madis Muller told Estonian Chamber
of Commerce earlier on Wednesday.
* “We had a situation where the central bank bought up bonds on
a massive scale, including government bonds, resulting in very
low interest rates”
* “If we now end this activity, it is in and of itself expected
that interest rates rise and countries’ real fundamental
indicators start to play a bigger role. So in the case of the
Italy, which has a larger debt burden and a more complicated
outlook, it is logical that interest rates have to rise faster
than in Germany’s case”
Read Full Report
June 14, 2022
SGH Insight
Final Thoughts Heading into the FOMC Decision

Is 75bp the new norm? Prior guidance said the Fed would continue with 50bp hikes until inflation rolled over, so will Powell signal that the same is true of 75bp? I can’t see that. It might not be until the end of the year before we see a string of sufficiently low inflation numbers such that the Fed sees the path to price stability. The Fed’s not going to commit to a path likely to mean 75bp hikes at each meeting for the rest of the year, but Powell will not rule out another 75bp hike in July or later. Powell will frame this in terms of a more “expeditious” move toward neutral and I think will not repeat the error of providing strong guidance like that leading up to this meeting...

...Aspirational market pricing? I see market participants pricing in a peak Fed funds rate at 4% next spring, an overly hawkish view that might not be validated by the SEP. I am not far behind that as I see median dots of 3.375% and 3.875% for 2022 and 2023, respectively. As I wrote that puts a 4+% rate potentially in play and that will likely be revealed in some dots, but I don’t think the median will make it there. And to be sure, whatever the end result, this is a Volcker-moment for Powell.
Market Validation
Bloomberg

The Federal Reserve raised interest rates by
75 basis points -- the biggest increase since 1994 -- and Chair
Jerome Powell said officials could move by that much again next
month or make a smaller half-point increase to get inflation
under control.
Slammed by critics for not anticipating the fastest price
gains in four decades and then for being too slow to respond to
them, Chairman Jerome Powell and colleagues on Wednesday
intensified their effort to cool prices by lifting the target
range for the federal funds rate to 1.5% to 1.75%.
“I do not expect moves of this size to be common,” he said
at a press conference in Washington after the decision,
referring to the larger increase. “Either a 50 basis point or a
75 basis-point increase seems most likely at our next meeting.
We will, however, make our decisions meeting by meeting.”

Bloomberg

The median prediction of officials was for a peak rate of
3.8% in 2023, and five forecast a federal funds rate above 4%;
the median projection in March was for 1.9% this year and 2.8%
next. Traders in futures markets were betting on a peak rate of
about 4% ahead of the release.

Read Full Report
June 13, 2022
SGH Insight
Powell’s Volcker Moment

That was another unpleasant day on Wall Street with stocks, bonds, and crypto all trading deep in the red. The proximate cause was a repricing of risk ahead of the FOMC meeting on the concern that the Fed would deliver a hawkish message with the dots and possibly surprise with a 75bp rate hike. One of the wild cards for me heading into this meeting was the Fed’s reaction function with respect to the elevated inflation and inflation expectations numbers. I think the Fed will reveal that reaction function by opting for the 75bp move.
Market Validation
Bloomberg

The Federal Reserve raised interest rates by
75 basis points -- the biggest increase since 1994 -- and Chair
Jerome Powell said officials could move by that much again next
month or make a smaller half-point increase to get inflation
under control.


Read Full Report
June 09, 2022
SGH Insight
To think that 75bp by September 8 is not all but locked in, even as the ECB stresses the importance of data dependency to its next rate hiking decisions, would be to badly misread the guidance and set-up that was provided by today’s policy statement and President Christine Lagarde’s press conference.

As we had written and was highlighted by Lagarde in an unusually frank blog posting on May 23, the ECB leadership’s strong preference has been to lead with a more ginger 25bp rate hike when it lifts off from its -0.5% deposit rate at its next meeting on July 21. Even the more hawkish national central bank governors pushing for 50bp hikes were by and large open to this more modest increment for lift-off, after eleven years of accommodative policy.

The case for such cautious moves in subsequent rate hikes has, however, been increasingly difficult to make as inflation numbers continue to stay uncomfortably high, and certainly in this, the early part of the rate hike cycle where it is abundantly clear that policy is some distance from where it needs to be.

This was especially the case after the awful 8.1% estimate for year-on-year May CPI that was released on May 31, and perhaps even more importantly, the jump registered in May Core CPI from an already problematic annualized 3.5% rate to 3.8%.

Indeed, in response to a question from a reporter today on why the ECB would even be hiking rates when the bulk of eurozone inflation was due to exogenous, imported factors, Lagarde pointed, without hesitation, to the passthrough of energy and supply chain inflation into the system, noting that over 75% of the items in the Eurostat’s CPI basket are now rising at a faster pace than the ECB’s 2% inflation rate target.

And so, while the decision whether to hike by 25 or 50bp at the September meeting has been left conditional on data developments over the interim period, the burden of proof for the ECB not to hike by 50bp – that the medium-term inflation outlook improves – was set deliberately high enough to make 50 essentially a lock for September 8 as well.

Market Validation
Bloomberg 6/21/22

The European Central Bank should exit sub-
zero interest rates in September, Governing Council Member Peter
Kazimir said.
“Negative rates must be history by September,” the Slovak
official told reporters in Bratislava on Tuesday, adding that
there’s a consensus that a half-point hike that month is “highly
probable.”

Bloomberg 6/21/22

The European Central Bank has “good reason”
to start raising interest rates next month, said Governing
Council member Olli Rehn.

“Key ECB interest rates will be raised in July, and a
further rise is expected in September,” Rehn said.
Speaking at a press conference in Helsinki, Rehn said that
next month’s hike will be 0.25 percentage point and that it’s
“very likely” the September step will be bigger than that, given
the outlook for inflation. Gradual increases will then continue,
he said.
Read Full Report
June 07, 2022
SGH Insight
...In practice, this means the RBA likely wants to raise the official cash rate another 100bps this year. Another 50bps could be in the offing when it meets July 5 before it steps down to 25bps moves at a couple of its five remaining Board meetings between August and December. That would give the Bank an opportunity to see somewhat backward looking but key quarterly inflation releases due July 27, and October 26...

...“The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,” Governor Philip Lowe said in his post decision statement.
In practice, this means the RBA likely wants to raise the official cash rate another 100bps this year. Another 50bps could be in the offing when it meets July 5 before it steps down to 25bps moves at a couple of its five remaining Board meetings between August and December. That would give the Bank an opportunity to see somewhat backward looking but key quarterly inflation releases due July 27, and October 26...

Market Validation
Bloomberg 7/6/22

The following is a reformatted version of a
statement published Tuesday on the Reserve Bank of Australia’s
website, after Governor Philip Lowe and his board raised the
overnight cash-rate target to 1.35%.
At its meeting today, the Board decided to increase the
cash rate target by 50 basis points to 1.35%. It also increased
the interest rate on Exchange Settlement balances by 50 basis
points to 1.25%.

Bloomberg 6/21/22

Australia’s central bank chief Philip Lowe
said interest rates are likely to rise by 50 basis points at
most in July, prompting money markets to scrap bets he would
track the Federal Reserve with a 75 basis-point move.

Lowe was asked directly after his speech whether 75 basis
points was on the table and responded that, like this month, the
board would only be considering a rise of 25-to-50 basis points
in July.
Read Full Report
May 31, 2022
SGH Insight
Tuesday Morning Notes
If You Don’t Have Time This Morning
We are still waiting for data to provide guidance on the Fed’s path beyond the July FOMC meeting. As a baseline, the Fed will not skip a meeting in September but instead continue hiking through the end of the year. When and if the Fed can transition to 25bp rate hikes is still an open question. The Fed doesn’t want to get too far ahead of the data, and while it waits for the inflation and labor market data still to come before the September meeting, it has a hard time committing to anything more than a return to a “measured” pace of rate hikes in September. Still, the Fed leans hawkishly, and we think the data will most likely push the Fed to continue with another 50bp hike after the July meeting.
Market Validation
Bloomberg 6/2/22

Federal Reserve Vice Chair Lael Brainard said market pricing for 50 bps hikes in June and July seems like a “reasonable” path, and it’s “very hard to see the case for a pause” in Sept.
Brainard speaks in interview on CNBC
If there’s no deceleration in inflation prints, it might well be appropriate to have another meeting where Fed raises rates 50 bps; could also raise by smaller amount
No. 1 challenge is to get inflation down, and Fed will do what’s necessary; she’s looking for a “consistent string of data” showing cooler inflation
Very hard to predict with precision when inflation will come down, but Fed’s tools are starting to have desired effect
“We do expect to see some cooling of a very, very strong economy over time”
Read Full Report
May 26, 2022
SGH Insight
Fed Not Thinking About a September Pause

It has been quite the swing in market sentiment over the past few weeks as contemplation of a 75bp rate hike gave way to speculation that the Fed will pause in this cycle as early as the September meeting. We think neither scenario is likely. Our baseline remains that the Fed will hike rates 50bp in each of the next two meetings while September stands as an opportunity for the Fed to transition back to 25bp rate hikes if the data allows. We are skeptical that the data will break in the Fed’s favor by September, but that is where the debate stands. Federal Reserve Chair Jerome Powell was very clear earlier this month that he doesn’t expect the Fed to pause until there was clear and compelling evidence that the Fed was on a path to restore price stability, and it is very unlikely that such evidence will emerge this year.
Market Validation
MarketWatch 5/31/22
Treasury yields climb steeply after Fed’s Waller says half-point rate hikes will continue until inflation subsides
U.S. government bond yields rose steeply Tuesday morning after a three-day holiday weekend, lifted by a hawkish speech from a Federal Reserve official on the need to raise interest rates beyond a neutral setting.
U.S. financial markets were closed Monday because of the Memorial Day holiday.
Tuesday’s rise in U.S. yields came as Federal Reserve Gov. Christopher Waller said in a speech in Frankfurt, Germany, on Monday that he wants to keep lifting interest rates by half percentage point increments until he sees signs that inflation is coming down.
“In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target. And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation,” Waller said.
By contrast, Fed Chair Jerome Powell has said half-point rate hikes are likely at each of the Federal Open Market Committee’s meetings in June and July, but that policy makers are prepared to do either less or more depending on how the economy evolves.

Bloomberg 5/31/22

Federal Reserve Governor Christopher Waller
said he wants to keep raising interest rates in half-percentage
point steps until inflation is easing back toward the US central
bank’s goal.

“I support tightening policy by another 50 basis points for
several meetings,” he said in remarks prepared for delivery on
Monday in Frankfurt. “In particular, I am not taking 50 basis-
point hikes off the table until I see inflation coming down
closer to our 2% target,” he told an event hosted by the
Institute for Monetary and Financial Stability.
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May 23, 2022
SGH Insight
The near-term path for rates remains unchanged. Fed speakers consistently endorse the consensus view of 50bp rate hikes at the June and July FOMC meetings. The September meeting is a potential opportunity to transition back to 25bp rate hikes if the data allows. If the Fed can’t find sufficient cover in the data to see a path back to 2% inflation within the forecast horizon, it will press forward with another 50bp. Ultimately, the decision may hinge on the September SEP inflation forecast. I think that if FOMC participants see they can hold steady or even lower the 2022 and 2023 inflation forecast, they will be inclined to transition to 25bp. However, I have been skeptical that the data will break in that direction, leaving me leaning toward another 50bp hike in September. The Fed will try to form a consensus around the September outcome at the July meeting but may not have sufficient data to establish a consensus either way. That of course would put the August Jackson Hole conference in the spotlight, although arguably it’s always in the spotlight.
Market Validation
Bloomberg 5/25/22

Here are the key takeaways from the Federal Open Market Committee’s May 3-4 meeting minutes released Wednesday.
There is a strong consensus for raising interest rates by half a point at the next FOMC meetings in June and July, given that inflation is near a four-decade high. That would bring the target rate to 1.75%-2% or the lower edge of the range of a “neutral” rate -- neither restrictive nor stimulative. That will set up an important Fed symposium at Jackson Hole, Wyoming, in late August, where Federal Reserve Chair Jerome Powell’s speech will be especially vital, and a pivotal committee meeting in September. There was no discussion of a 75 basis-point move.
While the plan is to reach “neutral” expeditiously, what comes next is far less certain. The committee expects to be “well positioned” later this year to reflect on the effects of policy tightening and assess what further moves are necessary. FOMC participants felt a restrictive rate might be necessary, depending on the evolving outlook, and they are focused on risks as well.
Read Full Report
May 17, 2022
SGH Insight
European Central Bank officials have rapidly coalesced around lift-off and the near-term monetary policy normalization path that we have been expecting for quite some time.

That consensus now lies squarely around a hard stop to the ECB’s Asset Purchase Program on July 1, followed rapidly by liftoff from the -0.50% deposit rate at the July 21 Monetary Policy Meeting. Barring any major shocks, that will most likely be followed by a 25-basis point hike at each of the ECB’s quarterly forecast round meetings on September 8 and December 15, to end the year at +0.25%...

...Likewise, unlike the US Federal Reserve, the ECB base outlook and consensus still leans heavily towards 25 basis point increment moves, and not 50s. Nevertheless, hawkish president of the Dutch central bank Klaas Knot noted just today that 50 basis point moves should not be ruled out if inflation fails to top out as expected.
With the ECB on path to be still adding accommodation well into next year, we believe an argument could already be made that the conditions for a 50-basis point hike are in place. That said, we do not get a vote, and we think a move to 50s is unlikely, even if not impossible. We suspect, if needed, the easier path to consensus at the ECB would be to add that fourth rate hike in October...

Market Validation
Bloomberg 5/21/22

European Central Bank President Christine
Lagarde said the first increase in interest rates in more than a
decade may come in July but downplayed the idea of a half-point
move amid concerns about economic expansion.
In a sign of the inflation concerns, the Netherlands’ Klaas
Knot this week became the first Governing Council member to
float the idea of a 50 basis-point move at the ECB’s July
meeting, though only if data worsen.
Asked about a possible increase of that size, Lagarde said
“it’s not something that I can tell you at this point in time,”
stressing that she shares “the same direction of travel” with
Knot but also that economic growth mustn’t be risked.
“We need to make sure that this is going gradually enough
so that we don’t put the break on this car that is moving,” she
said. “We have to lift the accelerator for sure to slow
inflation but we cannot be breaking any speed.”

Bloomberg 5/18/22

There’s broad agreement among members of the
European Central Bank Governing Council that policy rates should
exit sub-zero terrain “relatively quickly,” according to Bank of
Finland Governor Olli Rehn.
That’s to prevent inflation expectations from becoming de-
anchored, Rehn said in a speech in Helsinki on Wednesday.
“It is my view that it seems necessary that in our policy
rates we move relatively quickly out of negative territory and
continue our gradual process of monetary policy normalization,”
he said. “I am not alone, as this is also the indication given
by many of my colleagues in the ECB Board and Governing
Council.”
Read Full Report
May 16, 2022
SGH Insight
...Given the strength of the underlying economy – firms continue to add employees at a rapid pace, for example – the natural lags between policy and outcomes suggests September is still too early for a 25bp rate hike. But September could still be at a pivot point by signaling a 25bp hike at the next meeting. A transition back to a slower path of rate hikes would reduce the odds of a hard landing for the economy...

...Right now, it is beginning to feel like something of a sweet spot for the Fed where conditions have tightened enough to offer a path to trimming the demand side of the economy but not so much as to force a shift in the Fed’s rhetoric. That doesn’t mean the Fed won’t eventually need to bring rates even higher than current expectations, but it can potentially move more gradually later this year.

For now, it’s a waiting game for the Fed. Barring a market accident, the Fed is looking for clear and convincing evidence of a path to price stability to back down from 50bp rate hikes. The magnitude and speed of financial tightening will have an impact on growth. Reduced wealth due to lower equity and crypto prices, layoffs in tech as firms scale back and venture capital money dries up, higher interest rates on consumer lending, a stronger dollar, and slower global growth will weigh on spending, job growth, and, ultimately, consumer prices. But this will take some time. To be sure, the near-term data will be solid, it’s baked in the cake at this point. But we need to be looking toward the future; tightening cycles always have economic impact...
Market Validation
WSJ 5/17/22

Mr. Evans told reporters after his remarks that in terms of the pace of monetary policy tightening, he sees big moves that moderate into smaller ones as the year moves toward its close. “I’m expecting that before December, we will have completed in any 50s and have put in place at least a few 25s,” he said in reference to the basis-point size of those prospective actions.

Bloomberg 5/17/22

A top Federal Reserve official downplayed deteriorating liquidity conditions in financial markets, telling an audience Monday it was to be expected given rising volatility as investors grapple with uncertainty over global events and shifting U.S. monetary policy.
“In the global environment there’s a lot of uncertainty, and a lot of events happening. We’re also seeing our actions moving monetary policy, I think, in a very strong direction, to more normal rates,” New York Fed President John Williams told a Mortgage Bankers Association conference in New York. “Some of that volatility -- in say, the Treasury market -- is really the markets digesting that information.”
Signs of deteriorating liquidity in U.S. Treasuries, such as measures of market depth and bid-ask spreads, are “more or less in line with the increase in volatility in markets,” he said. “It’s just a reflection more of: A lot’s happening with market rates moving around, and therefore you’re seeing some of these measures of liquidity deteriorate somewhat, and pretty much consistent with past experience there.”
Williams’s comments echoed a semi-annual report on financial stability issues published on May 9, and were delivered amid a broad market downturn that has seen the S&P 500 index of U.S. stocks lose nearly 17% of its value since reaching a record high in the first week of the year.
The central bank is attempting to tighten financial conditions in a bid to slow the economy and bring down inflation from multi-decade highs. Policy makers authorized a half-point increase in the benchmark federal funds rate at the conclusion of their most recent meeting on May 4, marking the largest single hike since 2000.
Fed Chair Jerome Powell told reporters after the meeting that the central bank was on track to enact additional half-point increases at the next two meetings in June and July.
Williams said Monday such a plan “makes sense” as the Fed moves rates “expeditiously over this year back to more normal levels.”
“We do need to move -- again, the word is ‘expeditiously’ -- to more normal rates this year, and we’re on our way to do that. But we also need to watch, and we need to monitor what’s happening in the economy,” Williams said.
“We’ve already seen a tightening in U.S. financial conditions that is far greater than what we saw in all of 1994,” he added, referring to an episode where, under then-Chair Alan Greenspan, the Fed embarked on a surprise tightening campaign that led bond investors to sustain heavy losses.
Read Full Report
May 10, 2022
SGH Insight
A soft landing does not mean unemployment rates will remain at current levels. The Fed believes that with labor demand outstripping labor supply, the economy can be put on the path to price stability by bringing down the excess demand for labor. For example, this from New York Federal Reserve President John Williams:
Although we are facing highly unusual and challenging circumstances, I am confident we have the right tools to achieve our goals. In fact, we have an advantage over previous inflationary episodes: Our monetary policy tools are especially powerful in the very sectors where we see the greatest imbalances and signs of overheating—such as durable goods and housing. Higher interest rates will cool demand in these rate-sensitive sectors to levels better aligned with supply. This will also turn down the heat in the labor market, reducing the imbalance between job openings and available labor supply.
Still, Williams added in the Q&A:
“When I think of a soft landing, it’s really a matter of, yes we could see growth below trend for a while and we definitely could see unemployment moving up somewhat but not in a huge way…I think that’s the challenge,” Williams said.
Similarly, Mester said that unemployment may need to rise, and the economy may experience another “quarter or two” with negative growth. To me, this is the Fed setting the stage to redefine a “soft landing” as a mild recession. Arguably, the shift in the Beveridge curve suggests that the natural rate of unemployment has risen, so the Fed can’t regain a healthy labor market without unemployment rising and, historically, the Fed can’t engineer a rise in the unemployment rate without a recession. I think the Fed is coming to terms that a return to price stability will require some turbulence and likely a period of very low growth at best.
Market Validation
5/18/22

“This is a strong economy and we think it’s well positioned
to withstand less accommodative monetary policy, tighter
monetary policy,” Powell said. “There could be some pain
involved to restoring price stability, but we think we can
maintain a strong labor market.”
Fed officials say they can reduce demand for jobs without
raising unemployment by much from its current level of 3.6%.
Powell, confirmed by the Senate last week to a second four-
year term at the helm, said the labor market would still be
strong even if the jobless rate was “a few ticks” higher than
that.
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